how huge food companies like Cargill and Mcdonald’s, etc. protect themselves from extreme price changes.
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Cant speak about mcdonalds, but i do know walmart specifically works verbage into their contracts that a supplier is not allowed to sell anyone else at the price they are paying. Walmart is by far the biggest purchaser of these items, so they have a lot of leverage in their buying power.
Research the ABC’s of agriculture. That means Archer Daniels Midland (ADM), Bunge, and Cargill. Three of the top global companies for agriculture products, from raw materials to finished value added ingredients.
These companies contract with farms to grow product for them but what most people don’t realize is that crops/commodities are traded on a stock exchange like stocks. Grain, wheat, soy, corn, cocoa, sugar, livestock, etc. Are all traded daily and their prices are similar to a stock price. Since crops are planted and harvested at specific times of the year, and crops are a finite resource, those companies will contract with companies such as McDonald’s and the like for products like oil, protein, gluten, flour, etc. The contracts are usually annual but for more price volatile products, they’re bi-annually or quarterly.
Prices fluctuate based on the futures price, spot price, margin, demand, and other variables.
In short, the prices you see at McDonald’s factor in price volatilities for raw ingredients. Some years ingredients are cheaper and they have fat profit, other years it’s the opposite, but they’re pricing their products with a big enough margin to eat the increased cost if needed.
This is why the futures market exists. Airlines are completely dependent on them and so are farmers.
Oh! I actually used to work in restaurant accounting! Granted we had like 500 locations not the thousands you’re asking about.
We didn’t. When eggs shot up it went from number 3 ingredient expense to number 1. Our margins took a big hit for a couple of months but eventually prices stabilized. In the markets cost stayed higher we looked at our metrics and decided if we could accept the lower margin or not. I imagine it’s similar at larger chains they just have a much stronger negotiating on rates from vendors than we would.
They are the price changes. When McDonald’s needs new produce, they literally set aside land just to grow what they want. They plan so far ahead and establish massive contracts. Their contracts and land are what makes you pay more in the grocery store since that land is no longer going to your food.
Big example is years ago, there was a big story of a “buffalo wing shortage in America” going around during a Superbowl. Like everyone was running with this story. Was there less chicken? No. McDonald’s was literally buying the wings off all the chickens to launch mighty wings that summer. They bought them all up and froze it. It’s also the reason they never ran mcrib year round – they buy all the pork scrap and freeze it all year, then can only launch it for a little at a time. There just wasn’t enough cheap pork supply flying around to have it year round.
They hedge. Say they buy corn from a farmer for delivery in September. When they ink this deal they simultaneously sell a “futures” contract on a commodities exchange. This locks in their profit. All kinds of nuance, but in general this is how they prevent price shocks from killing them.
contracts. They have an agreement with “meat company” to buy X lbs (just throwing a number out) at Y/pound for Z years. This contract give them the meat they are buying at the same price no matter what.
1. Spread. Food prices come from loss of yield, not higher demand. Global stores can adjust as needed and inflated prices across a broad board, not where things get pricy.
2. They have a team of economists dedicated to pricing things to make money. There are a team of chemists replacing pricy I gradients with alternative synthetic materials.
3. Prices have gone up have you been to a fasg food joint lately? $5 is no longer the price of a meal, that’s the price of a single item, if that.
Multiple people in the family have worked in different aspects of this business, and it boils down to two things:
1. Volume
2. Making good predictions
Otherwise you end up like [the reddit gourd guy](/r/wallstreetbets/comments/kzoh1c/i_am_financially_ruined_agricultural_futures/).
McDonald’s prices have skyrocketed in recent years. If you mean just over the very short term, it’s all about volume.
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